Debt vs. Investing: How to Prioritize Your Financial Goals

Being aware of how much debt you carry is a key component to managing your wealth. Being aware of what debt you carry can help you design a financial plan optimized for your needs and goals. When analyzing your current debt, consider the type of debt you're carrying. High-interest debt—typically credit cards or personal loans—can be a financial burden, and it can be essential to address it as quickly as possible.

It is easy to slip into deep debt with high-interest debt. If your interest rate is higher than the rate of return your portfolio achieves, you will accumulate debt, faster than you could earn. If your credit card or loan is charging interest rates of 15% or more, this is likely a higher cost than what you could earn by investing. When left unpaid, debt with high-interest rates can accumulate quickly. Paying down this type of debt quickly means less money spent on interest, freeing up funds that can eventually be put toward investments or savings.

If your high-interest debt is substantial, it may make more sense to allocate extra funds to pay it down first. This will give you peace of mind and allow you to start building wealth with the money that would otherwise go to interest payments.

When questioning investing or paying down debt, an important factor to consider is the rate of return you expect from your investments versus the interest rate on your debt.

• Investment returns: Over the long term, stock market returns tend to average 7-10% annually. If you're investing in retirement accounts (like a 401(k) or IRA), those returns can compound and grow, making your investments work for you.
• Interest rates on debt: If you have debt with an interest rate higher than the expected rate of return, paying it down could be a better choice in the short term. It’s difficult to reliably earn a high rate of return in the stock market year after year without taking on significant risk, so you may consider focusing on paying off the debt instead of trying to make enough to keep up with it. If your debt is at a lower interest rate and you can invest in vehicles that consistently yield higher returns, you might find that investing is the more lucrative option.

Another important factor is your financial goals. Are you trying to build wealth for retirement, save for a big purchase, or achieve financial freedom? Understanding your long-term objectives will help you determine the right approach.

• Retirement savings: If retirement is your top priority, investing in tax-advantaged accounts like a 401(k) or IRA can help you build wealth over time. This is especially true if your employer offers a matching contribution, as this "free money" boosts the return on your investments.
• Short-term goals: If you’re saving for a house or other large purchases in the next few years, you may want to balance paying down current debt to set you up for success with the future payment.
• Long-term goals: If you're aiming for long-term growth, you might consider a hybrid approach. This involves continuing to make regular payments toward high-interest debt while also starting to invest modestly for retirement.

For many people, the solution is a hybrid approach—paying down some of the high-interest debt while simultaneously investing for long-term goals. This strategy can allow you to tackle immediate financial concerns while also helping you set your portfolio up for future success. Consider setting up automated contributions to a retirement account (like a 401(k) or Roth IRA), so you're consistently investing even while you pay down debt.

This approach can help you make progress on both fronts—reducing debt while building wealth.

If you find yourself stuck between debt repayment and investing, or if you're unsure which course of action aligns best with your financial goals, seeking professional advice may be the best next step. A financial advisor can help you evaluate your debt situation, assess your goals, and create a tailored strategy that balances both priorities effectively.

Choosing between paying off debt and investing can feel like a daunting decision, but it doesn't have to be all or nothing. By evaluating your debts, considering the potential returns on investments, and balancing your short- and long-term goals, you can create a strategy that works for you.  At the end of the day, achieving financial security is a marathon, not a sprint. Whether you prioritize debt reduction or investing, a balanced and disciplined approach will pay off in the long run.

Sources:

• Fidelity. "Should you pay down debt or invest?". (2025). Retrieved from https://www.fidelity.com/learning-center/personal-finance/pay-down-debt-vs-invest.
• Investopedia. "Should I Pay off Debt or Invest Extra Cash?". (May 1, 2024). Retrieved from https://www.investopedia.com/articles/pf/08/invest-reduce-debt.asp.